Beware Of Short Sales

Many people who invested in real estate at the end of the boom are in financial trouble. I have been getting more and more inquiries from individual investors facing foreclosures of their investment properties. Often, people tell me they are discussing "short sales" with their mortgage lenders. In a short sale, the lender allows the house to be sold for less than the mortgage balance. The borrower avoids a deficiency judgment. The lenders would rather get most of their mortgage through a sale arranged by the owner then take the property back at a foreclosure sale. Borrower should beware of short sales.

The problem for the borrower in a short sale is that the difference between the payment to the mortgage company and the full mortgage balance is a forgiveness of debt for tax purposes. The mortgage company is forgiving the debtor’s liability for the deficiency. The IRS considers forgiven debt to be taxable income to the borrower. The mortgage lender may send the borrower a Form 1099 for the amount of the deficiency. Most borrowers who cannot afford mortgage payments can even less afford additional tax liability. Owing money to the IRS is usually worse than owing money to a mortgage lender. Many mortgage lenders will not pursue debtors for deficiency judgments; the IRS will always pursue unpaid taxes. For that reason, most borrowers will fare better by letting their property go to foreclosure, even if the foreclosure may result in a deficiency liability.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Comments

[Dr. Muffazal Lakdawala]

Great.. i was expecting some thing like this only really thanks for sharing it.

[buying investment property]

You need to think first before making an action to avoid regret. Like this short sales, if you are not aware enough of the cause and effect on it, you will regret of your decisions.

[EPOC]

Headed into Short Term Disability that is 1/2 pay and roughly $300,000 underwater (we owe $630k on my 2007 Mortgage in Florida on a house that Zillow rates as $328,000). What is the likelihood we would get a Short Sale Approved with a deficiency waiver? Especially as I head into the hospital in a month or two.

[Scott]

My property in Fla. is almost finished with the short sale.The bank has forgiven the debt.Now, I find an investor has come out of the woodwork and demands $25,000. from me.What do I do?

[Lynn]

Joy,
I understand your frustration but until HAFA came into existence, most lenders wouldn't even discuss the possibility a short sale without a purchase contract for review. HAFA, however, has been less than stellar in its success and in my opinion has done little to assist distressed homeowners.

Best of luck trying to mandate how ALL lenders, investors, mortgage insurance companies, etc. must abide by a uniform code. So far, it hasn't shown any signs of success.

[David]

EB we help people with exactly the same situation on a daily basis. Contact me or my office if you would like further explanation or want more information regarding short sales.

Visit www.shortsaleops.com for contact information.

[Joy Mitchell]

It should be illegal for Real Estate Brokers to list a property as a "potential" Short Sale in the MLS. Before it is listed all the lender's should provide verification that the list price is approved by them and the property will be approved by the lender for short sale. The Banks are wasting untold time and money of the public going through a process that is ass backwards for months then at the very end state the seller does not qualify for a short sale. The regulations and laws should be a uniform process for all lenders and banks. Sellers should apply for binding short sale approval before the property is listed in the MLS.

[E.B.]

Due to a job change, my husband and I were forced to relocate from Florida to Georgia in 2009. At the time, our home in FL was valued at approx 80K less than our mortgage balance, so we opted to rent it rather than try to sell. Since then, the value has continued to fall, and the value is now 100K less than our mortgage balance. We have been unable to keep it rented, and are struggling to pay the mortgage. We currently live in an apartment in Georgia and are expecting our second child. If only we could get rid of the house in FL, we could provide a better life for our children and move out of this apartment and into a house in Georgia. Is there any way that we can get out of this without having to pay the 100K or the taxes on it? We're trying to conserve our credit as much as possible as we are a young family.

[Apartments Barcelona]

I have been through the whole content of this blog which is very informative and knowledgeable stuff, I would like to visit again.

[John]

My wife and I are about 50,000 upside down in our home. We both want to go on our social security but can not afford to. We are both worn out from our jobs and want to retire. Can we look to short sale as a way to get out from under the burden? We have some savings and ira's...must we spend them or lose them?